How is a retirement compensation arrangement taxed, for the employer, the trust and the employee?
As of October 2026, RCA contributions carry a 50% refundable tax under Part XI.3: the employer deducts the full contribution but remits half to the CRA, and the trust's income and gains attract the same 50%. The CRA refunds $1 for every $2 the custodian distributes, and the employee reports each distribution as income on line 13000.
Who pays the 50%, on which account, and by when?
An RCA is taxed at three points: the employer's contribution, the trust's income, and the payout. Each one has its own account, slip and deadline, all set out in the CRA's T4041 guide, last updated July 20, 2026 canada.ca.
| Event | Tax | Who files | Account and slip | Deadline |
|---|---|---|---|---|
| Employer contribution | 50% withheld from the contribution and sent to the CRA | Employer | RC account (Form T733), T737-RCA box 18 | Remit by the 15th of the next month; slips by the last day of February |
| Trust income and capital gains | 50% refundable tax | Custodian | T account (Form T733), T3-RCA return | 90 days after the December 31 year end |
| Employee contribution | 50% refundable tax | Custodian | T account, T3-RCA return | 90 days after the December 31 year end |
| Distribution to a resident | Regular income tax withheld, no CPP or EI | Custodian | RP account (Form T735), T4A-RCA box 16, PD7A | Remit by the 15th of the next month; slips by the last day of February |
| Distribution to a non resident | 25% Part XIII, a treaty may reduce it on periodic pension payments | Custodian | NR account (Form T735), NR4 | NR4 by March 31, or 90 days after the trust's year end |
The employer withholds 50% of each contribution and remits it on its RC account by the 15th of the month after it withheld it. The custodian files a T3-RCA every year, even when nothing happened in the trust, and the refund is processed through that return canada.ca. Form T733 opens the RC and T accounts; Form T735 is only for the income tax the custodian withholds on payouts.
The special payments chart confirms an RCA payment carries income tax but no CPP and no EI canada.ca. The employer deducts what it paid as contributions in the year, for services by an employee or former employee
laws-lois.justice.gc.ca. That's paragraph 20(1)(r), and the T4041 points to box 18 of the T737-RCA as the amount it may deduct.
$100,000 in and a $20,000 payout bring back a $10,000 refund
The refundable tax is a running balance under subsection 207.5(1): 50% of all contributions, plus 50% of the trust's net income and capital gains, minus 50% of all distributions laws-lois.justice.gc.ca. The custodian pays the yearly increase and gets back the yearly decrease under section 207.7
laws-lois.justice.gc.ca.
| Step | Amount | Refundable tax balance | Trust assets |
|---|---|---|---|
| 2026: employer contributes $100,000, withholds 50% | $50,000 to the CRA, $50,000 to the custodian | $50,000 | $50,000 |
| 2026: trust earns $4,000 of interest, pays 50% | $2,000 to the CRA | $52,000 | $52,000 |
| 2027: custodian pays the retired executive $20,000 | Refundable tax falls by $10,000 | $42,000 | $32,000 |
| 2027: CRA processes the T3-RCA | $10,000 refund to the trust | $42,000 | $42,000 |
Your client corporation deducts $100,000 in 2026 under 20(1)(r), even though only $50,000 reached the trust. The executive pays no tax until 2027, then includes the full $20,000 in income, and the custodian withholds income tax from it. The refund is the 2026 balance of $52,000 minus the 2027 balance of $42,000, so $10,000.
Two details change the cash flow. The custodian funds the $20,000 first and waits for the T3-RCA to be processed. And when contributions or income arrive in the same year as a payout, the refund is netted against the new 50%, so the trust only sees the year's net decrease.
What happens when the employer pays the full contribution to the custodian?
The contribution is grossed up. If the employer doesn't withhold the 50%, it still has to remit an amount equal to what it paid the custodian. In the CRA's example, a $5,000 contribution paid in full means the employer remits $5,000, and the gross contribution becomes $10,000 canada.ca.
Check the plan terms when this happens, because the T4041 warns that the gross amount may exceed what the RCA allows. The T4041 lists that equal remittance as the employer's penalty for not withholding; the separate 10% charge, or 20% for a repeat failure made knowingly or through gross negligence, applies to income tax a custodian fails to withhold from payouts canada.ca.
A late remittance of the 50% is penalized like late payroll remittances: 3% for one to three days late, 5% for four or five, 7% for six or seven, and 10% after that, generally on the part over $500 canada.ca.
Which contributions and payments get special treatment?
Letters of credit are the big one. An amount paid under a specified arrangement to get or renew a letter of credit or surety bond that secures future retirement benefits is an excluded contribution, and from March 28, 2023 it is left out of the 50% calculation laws-lois.justice.gc.ca.
When the RCA is funded with a life insurance policy, the employer is treated as the custodian and twice the premiums paid count as contributions under subsection 207.6(2) canada.ca.
Employee contributions are deductible under paragraph 8(1)(m.2), claimed on line 20700, but only when the terms of employment require them, they go to a custodian resident in Canada, and they don't exceed the employer's contributions for the same year canada.ca.
Round trips don't work. The 20(1)(r) deduction excludes amounts paid as part of a series of payments and refunds of contributions laws-lois.justice.gc.ca, and a distribution in such a series doesn't reduce the refundable tax either
laws-lois.justice.gc.ca. The CRA may deny the deduction when contributions are effectively refunded in a later year
canada.ca.
What if the trust investments fall below the refundable tax balance?
The 207.5(1) formula has no interest credit, so the CRA holds the 50% at a zero return until payouts draw it down. If markets drop, the trust can end up with less in it than the CRA is holding.
Subsection 207.5(2) fixes that for simple portfolios. When the trust holds only cash, debt obligations and shares or mutual fund trust units listed on a designated stock exchange, the custodian can elect in the T3-RCA to treat the value of that property as the refundable tax laws-lois.justice.gc.ca. A lower deemed balance means the difference comes back as a refund under 207.7(2)
laws-lois.justice.gc.ca.
Watch what the trust buys. A prohibited investment triggers a tax of 50% of its fair market value under section 207.61, an advantage is taxed under 207.62, and paying either tax out of RCA property counts as a distribution canada.ca.
How does the employee report RCA income?
Every distribution is income under paragraph 56(1)(x), including a return of contributions, when it relates to the taxpayer's office or employment laws-lois.justice.gc.ca. Your client reports the T4A-RCA amount on line 13000
canada.ca and claims the tax in box 22 as withheld.
RCA income can be split with a spouse once your client is 65, but only the box 17 portion: life annuity payments for periods of employment that supplement a registered pension plan canada.ca. It never earns the $2,000 pension income amount, because the CRA lists RCA distributions as ineligible pension
canada.ca. The pension income splitting page shows how box 17 runs through Form T1032.
Comparing an RCA with a registered plan for an owner manager? Start with how an individual pension plan works and how the pension adjustment is calculated. An RCA sits outside that registered system, which is why the 50% tax exists.
Sources
When is the 2026 T3-RCA due?
March 31, 2027. The return and any balance owing are due 90 days after the trust's December 31 year end, and the custodian files even in a year with no activity canada.ca.
Who buys an interest in an RCA, and what is withheld?
The buyer withholds 50% of the purchase price, or 25% when buying from a non resident, and remits it by the 15th of the next month. The seller includes the proceeds in income under 56(1)(y) laws-lois.justice.gc.ca, and the buyer issues a T4A-RCA by the last day of February
canada.ca.
What happens to a non resident executive who retires abroad?
The custodian withholds 25% Part XIII tax, and a treaty may lower it on periodic pension payments, then reports on an NR4 canada.ca. Check the treaty rate on the Canada US treaty withholding page when the executive moves south.
Do slip penalties apply to the T737-RCA and T4A-RCA?
Yes. Late slips and summaries cost a minimum of $100 and a maximum of $7,500, and a late T3-RCA costs 5% of the unpaid tax plus 1% for each full month late, up to 12 months canada.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.